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Vlad Manole is at the Development Research Group of the World Bank.
Although the size of the offshore banking sector is an impressive 24 times of Bahrain’s GDP, the offshore banking units (OBUs) do not participate in domestic economic activities outside of providing very limited co-financing for large public-sector-led infrastructure projects.
More recently, in light of Dubai’s steps to encourage offshore banking as well as international pressures on the offshore banking business, Bahrain targeted Islamic finance as a source of growth in the financial sector. The strategy involves creating an efficient capital market with Islamic financial instruments operating in accordance with Shariah.
Their method is based on the assumption that the production units have constant returns to scale. Banker, Charnes, and Cooper (1984) later relaxed the assumption and proposed a model with units of production with variable returns to scale. Theoretical extensions of these methods and empirical applications are discussed in Seiford (1996) and Cooper, Seiford, and Tone (2000).
X = [x1,…, xN ] is a (K × N) input matrix with columns xi and Y = [ y1,…, yN ] is an (M × N) output matrix with columns yi.
There are five widely recognized functions performed by banks: profit maximization, risk management, service provision, intermediation, and utility provision (see, for instance, Bergendhal, 1998).
As indicated earlier, the set contains 2003 data for four Bahraini banks provided by the BMA.
An important caveat is in order here. Comparison of the results across these studies should be made with caution given the presence of non-Singaporean banks in our sample. However, the existence of GCC banks in the sample is relevant only to the extent that they are on the efficiency frontier (see Table 2). If all of them were located inside the frontier, they would not have changed the DEA outcome for Singaporean banks, making the comparison across studies more meaningful.
Unfortunately, the available data do not allow us to differentiate between the price and the quantity of inputs used (in this case labor), thus limiting our inferences about the efficiency of their use only to the overall value.